Question of the Day

Did illegal voters swing any congressional races?

:00BodyText1 =Over the last eight years, Americas tax burden has grown tremendously. Since 1992, total federal tax

receipts have increased 86 percent and income tax receipts have increased 111 percent. Why then has there been no outcry?

One explanation has been the so-called "wealth effect," whereby millions of Americans have felt themselves relatively wealthier despite the growing tax burden. With the economy evidently slowing and the stock market sliding, it now becomes realistic to ask if the equation could be reversed. Could a "poverty effect" create a demand for a tax cut? If so, the timing of such a reversal could have profound effects on Washington´s upcoming tax policy debate and on future politics.

The Congressional Budget Office (CBO) cites the rapid growth of revenues in its latest estimate of the federal budget: "from 1994 to 2000, revenues rose at an average annual rate of 8.3 percent, much fast than GDP… . Consequently, as a share of GDP, revenues rose from 18.1 percent to 20.6 percent in 2000 a level exceeded only once, in 1944."

Nor is it just total federal tax receipts that have grown. Income tax receipts are at an even higher level historically. CBO states: "From 1993 to 1998, those receipts averaged growth of more than 10 percent a year… . But in fiscal year 2000, they jumped more than 14 percent, reaching their highest share of GDP ever."

Similarly, "personal income tax liabilities grew at an average annual rate of about 11 percent from 1994 to 2000 … as a result, personal income taxes as a share of taxable personal income rose by 3 percent from 11.5 percent to 14.5 percent."

Not only is America´s tax burden high by historical standards, it is growing. Without a tax cut, total federal taxes and income taxes as a percentage of GDP will average 20.3 percent and 10.3 percent respectively from 2001-2011 this year they will be 20.7 percent and 10.4 percent, new postwar and all-time records respectively.

And it is growing relative to the economy itself. CBO states 2001 will mark "the ninth consecutive year in which the growth of revenues outstripped the growth of the nation´s gross domestic product." This is happening because more and more taxpayers are having more and more of their income pushed into higher marginal rate brackets a phenomena very similar to the onerous "bracket creep" caused by inflation in the 1970s.

So with an already historically high and growing tax burden caused by more people having more income pushed into higher brackets, why has there not been an outcry? One theory is that the burden is ameliorated in people´s minds by a "wealth effect." If you earned $50 dollars last year and paid 10 percent in tax, then earn $100 this year and pay 20 percent tax, you still have a lot more money left in your pocket even though you are paying a double tax rate and 4 times as much in the taxes. In short, Americans had a bottom-line attitude.

Of course, the "wealth effect" works to ameliorate the larger tax bite only so long as you are moving forward. What happens, as is apparently the case with the economy now, when you stop? Remember too that a good bit of the "wealth effect" came from portfolio increases increases on assets never actually received. What happens now that those illusory gains are illusory losses?

Won´t those pushed into higher brackets fall back into lower ones? No, that´s because the tax brackets are linked to inflation, not to the growth in the economy itself. Thus if you rode the economy up, you will still be stuck in the higher brackets if you just keep pace with inflation. Imagine a person shouldering a higher tax burden in recent years, then suffering significant paper losses on their assets, and whose income now just equals inflation. How does this person not feel a "poverty effect" especially if it continues as financial commitments (children, etc.) increase?

The extent and duration of the economy´s slowdown are unknown as yet. However, it is not too early to wonder if latent potential doesn´t exist for a growing tax revolt. If so, the political implications could be enormous. No one saw California´s Proposition 13 coming in 1978 either, yet it passed almost 2-1 and benefited property owners a relatively wealthy group.

The current "class warriors" could well find themselves in serious straits: moving ever farther onto ever thinner ice in opposing a tax cut in the face of ever growing budget surpluses. It is naive to think America´s rapidly increasing tax burden can combine with an economic downturn and have no effect on either the economy or the electorate. Perhaps America´s "irrational exuberance" could become a "rational abhorrence" for the current high tax burden.